Hurricanes and USAs

2017-09-15

CHRIS EDWARDS, CATO INSTITUTE

Congress may loosen 401(k) rules to allow Harvey and Irma victims to access their retirement savings without the usual 10 percent penalty on early withdrawals. The Washington Post reports mixed views from experts on the idea. In the past, the government has allowed “hardship loans” against 401(k) assets in the wake of disasters.

Individuals own the money in their 401(k) accounts, and after disasters they may need to use it. However, a better way for Congress to address that need is to create Universal Savings Accounts (USAs).

As Ryan Bourne and I describe in this study, USAs would provide a tax-efficient vehicle for families to save for all purposes, including saving for unplanned costly events. USAs would be simpler and more flexible than current single-purpose accounts in the tax code, including those for retirement, education, and other purposes.

When a disaster happened, families could simply withdraw money from their USAs as needed without government paperwork or penalties. They could leave their retirement accounts untouched.

Ryan and I discuss how current tax policies favor saving for some purposes over others. But all saving is beneficial because it improves financial security and funds capital investment in the economy. USAs would reduce the tax bias against saving in an across-the-board manner for all individuals, and the accounts would encourage people to save for future expenses rather than rely on debt, retirement accounts, or government aid.

In Congress, Senator Jeff Flake (R-AZ) and Representative Dave Brat (R-VA) have introduced companion bills to create USAs. Ryan and I would tweak their plan to allow individuals to build even larger accounts than proposed.

We think USAs would be very popular, a real boon for individual saving and financial stability. Both Britain and Canada have created USA-style accounts, and large shares of people in all age and income groups in those countries use them.

So rather than fiddling with 401(k)s, Congress should be bolder and create a liquid and flexible savings vehicle to help all families. USAs would be a great addition to the tax reform plan that Congress and the Trump administration are assembling.

Chris Edwards is the director of tax policy studies at the CATO Institute and editor of www.DownsizingGovernment.org. He is a top expert on federal and state tax and budget issues. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.

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